Navigating the China Seas — Turbulent and Calm

What does a sea change in China’s leadership mean for Americans doing business there?

By Henry Levine ’72

My interest in China began at Bucknell. And 1972, the year of my graduation, marked a milestone. At home for winter break, I watched President Nixon’s now-famous February trip with the fascination shared by most Americans — but enhanced for me by the understanding of Chinese history and politics I had acquired in several Bucknell courses taught by Doug Spelman.

U.S.–China relations have grown dramatically since that historic trip. This relationship has brought substantial benefits to both countries, but U.S. companies continue to face complex challenges in the China market, yielding a spillover effect on overall U.S.–China relations. With the presidential election in this country and the recently completed transition to a new Chinese leadership team — headed by President Xi Jinping and Premier Li Keqiang — now behind us, it is worth looking at the roots of U.S. company concerns and the outlook for resolving them.

On the one hand, U.S. companies operating in China face business challenges similar to those found around the world. Recruitment and retention of staff and rising costs rank high as concerns on surveys of U.S. companies in China. But in addition, these companies face problems arising from China’s economic and political system and its history and culture.

One set of issues revolves around weakness in the rule of law. It’s not that the laws as written are necessarily inadequate; it’s just that they are not enforced fairly and effectively. The protection of intellectual property rights (IPR) is the poster child for this issue. Laws related to protection of patents, copyrights and trademarks are generally consistent with international practice, but enforcement is not.

Some in the U.S. believe weak enforcement of IPR laws is a conscious policy of the Chinese government aimed at facilitating theft of technology from foreign companies. There are officials in China who endorse this approach, but the roots of the IPR enforcement problem run much deeper. In fact, Chinese companies steal more from each other than from foreign companies, which undermines China’s ability to create homegrown, innovative products.

In addition, weakness in the rule of law creates major challenges for U.S. companies. In a society where personal relationships are important to law enforcement, Chinese companies usually have advantages over their foreign competitors. China remains a culture in which relationships trump enforcement of rules. The local police chief who knows his friend’s factory is producing counterfeit batteries in violation of Chinese law is likely to look the other way for the sake of protecting the friendship rather than the law.

A second set of issues revolves around the unusually close relationship between Chinese companies and their government. U.S. officials, in general, put some distance between themselves and the country’s companies, which allows them to treat all competitors in an evenhanded way. Conversely, Chinese officials at the central, provincial and local levels tend to identify closely with “their” companies. This identification may be based on personal relationships, but it also reflects the vestiges of the old planned economy in which the government oversaw all production, and companies did not exist as separate entities.

Today, there is a separation of the government and the marketplace in a formal sense, but old ways of thinking change slowly. In fact, many agencies have an explicit dual role, as a neutral regulator and as a promoter of the Chinese sector under their jurisdiction. Further complicating the situation, China maintains a sizable number of large and influential government-owned companies. Under these circumstances, the temptation for Chinese officials to take actions favoring domestic over foreign firms is strong.

In fact, the problems have been heightened in recent years under the leadership of the recently retired President Hu Jintao and Premier Wen Jiabao. In this period, we saw an increased tendency for the Chinese government to intervene in economic matters to provide advantages for Chinese companies relative to their foreign competitors, especially in the high-tech sector. The methods used have been many, including, for example, insistence in some cases that a foreign company transfer some of its technology to a Chinese partner as a condition for government approval of a project in China.

A major factor driving the re-emphasis on government intervention was the global financial crisis, emanating as it did from the U.S. In the eyes of many Chinese policymakers, the crisis discredited our model of relatively less government intervention and encouraged the idea that China’s model of greater government involvement was superior. As a result, the influence of those in China who supported more government intervention was strengthened.

Despite these significant issues, U.S. companies have continued to do well in the China market. Between 2000 and 2011, U.S. exports to the world outside China grew by 80 percent, while our exports to China in that period grew by 542 percent. U.S. companies that have invested in China also are profiting. According to the U.S. China Business Council’s 2012 China Business Environment Survey, of its members operating in China, 89 percent reported they were profitable.

Yet, the continuing sense that the Chinese system does not treat foreign companies fairly has taken a toll. For years, major U.S. companies have expended time and money to support the further development of bilateral relations and block legislation that would damage the relationship. In many ways, the U.S. business community has been the ballast helping to stabilize a relationship that has often sailed through choppy seas.

More recently, a subtle but noticeable shift has taken place in the attitudes of major U.S. companies active in China. Though still supportive of strong U.S.–China relations, their enthusiasm has been dampened by lack of progress in the problem areas and especially the shift in recent years toward a greater emphasis on government intervention to support Chinese companies.

The role of the U.S. business community as the ballast of U.S.–China relations remains, but the weight of that ballast has lightened a bit. This is reflected in part in a tougher approach by the current administration toward trade and investment issues with China. And this issue has played out against the backdrop of broader concerns in Washington over China’s growing military power; aggressive cyber spying; the role a rising China is playing in disputes over islands in the South and East China seas; and in the management of global hotspots such as Iran, Syria and North Korea. Never before has the stabilizing effect of strong U.S.–China economic relations been needed more to keep the relationship on track.

So, with new leaders now in place in Beijing, what is the outlook going forward?

One thing is for sure: The roots of the core problems U.S. companies face are deep and won’t be solved overnight. U.S. companies will continue to have to operate in an environment where relationships trump rules, laws are not well enforced and Chinese officials identify with local companies. There is no quick fix here, no magic wand that any U.S. administration can wave to alter the basic nature of the Chinese system and its culture.

On the other hand, a conscious effort by China’s new leaders to move toward greater competition and use of market forces as drivers of economic growth and innovation would make a big difference. The track record of the last several years of the Hu/Wen administration was pretty dismal. Lack of a strong push from the top allows more negative tendencies to flourish through the system.

There are a number of signs that encourage the view that President Xi and Premier Li are working to put momentum again into economic reform and opening policies. The fact that Xi’s first trip out of Beijing following his appointment to the top party post late last year was to the southern city of Shenzhen was significant. In making this journey, he retraced the famous 1992 trip by Deng Xiaoping, which relaunched reform and opening policies after several years in which they faltered in the face of conservative opposition. There is no doubt that Xi was signaling his intentions regarding reform via this trip, and subsequent statements and personnel appointments have echoed this message.

Managers of government-owned companies, political conservatives and others will fight hard to oppose a new round of economic reform and opening; so, the degree of success of Xi/Li will remain to be seen. However, a strong reform push would be welcome news for U.S. companies that understand the enduring complexities of operating in China, but above all want to avoid managing those issues while coping with wave after wave of government policies aimed at strengthening their Chinese competitors. And the U.S. government would warmly welcome progress toward reform, as a sign that China shares our basic view of the importance of the market and is striving to create a more level playing field for U.S. companies in China.

In the meantime, we will be creating new leaders equipped to deal with U.S.–China relations. Among the many improvements at Bucknell since my day have been the establishment of the School of Management with its global management major and a sharp expansion of the East Asian Studies program. China is a critical market for U.S. companies and the development of U.S.–China relations will shape the kind of world our children will live in. The future is uncertain, but I know that an expanded participation by Bucknellians will only be positive for the outcome of these important issues.

Henry “Hank” Levine ’72 is a senior director with the Albright Stonebridge Group, a strategic advisory firm in Washington, D.C. Before entering the private sector, he spent 25 years as a foreign service officer with the U.S. Department of State. He served in the State Department’s Office of China Affairs, at the U.S. Embassy in Beijing, and as U.S. consul general in Shanghai. He also served as the deputy assistant secretary for Asia in the U.S. The opinions expressed in this article are his own.

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